Bread may be Everyman's staple, but in Turkey it's a matter of national pride. The Turks consume an average 145 kilograms -- about 320 pounds -- per capita annually. It's a culinary curiosity that once earned Turkey a "Guinness Book of World Records" entry as the world's biggest carbo loader.
For Turkish private equity firm Turkven, it was also a commercial phenomenon waiting to be exploited. About a decade ago, then-three-year-old Turkven, an Istanbul affiliate of Advent International Corp., put money down on a company called Unmas. Unmas was Turkey's largest commercial bread producer, with about 80 different types of bread selling under the UNO brand. With $15 million in sales, it boasted a 40% market share, distributing to Carrefour, Burger King and other retail outlets and fast-food chains. However, packaged bread was still a tiny portion of bakery sales.
At the time, Unmas' owner, Turkish conglomerate Dogus Group, was eager to divest the business that it acquired from the founders. Turkven and Advent came in, partnering with the founders on a management buyout. They renamed the company UNO. By the time the sponsors exited their investment through a profitable sale to strategic partner Doruk Group Holding AS, UNO had some $44 million in sales, new products fortified with vitamins and minerals, an expanded distribution network and a bigger market share.
Today Turkven has earned its place as the largest shop in Turkey's indigenous PE industry, which admittedly is not that large to begin with. With $1.5 billion in assets under management, the 12-year-old Turkven pales relative to its Western European brethren in terms of war chests. But it is a young outfit in a young industry with plenty of room to grow.
"Private equity is a relatively new asset class in Turkey," says Evren Unver, a director at Turkven, who at 40 says he is among the oldest of the firm's 16 investment professionals.
The Turks may not recognize Turkven's name, but they will know its portfolio assets: supermarket chain Migros Türk TAS; pizza chain Domino's Pizza Restaurantlari AS; car rental operator Ekim Turizm San. ve Tic. AS, which does business as Intercity; satellite pay-TV provider Digiturk; financial services outsourcing company Provus Bilisim Hizmetleri AS; and cosmetics retailer Tekin Acar Cosmetics.
All but two of its 16 investments, including those that it has exited, are dominant players in their sectors. All have benefited from the country's investor-friendly -- perhaps overly friendly -- macroeconomic factors and favorable demographics. The firm has grown and matured on the back of Turkey's big leap forward as one of the most promising emerging markets globally.
Compared to the mess in many of its European neighbors, Turkey is in an enviable spot. The country may well be pleased that it hasn't yet made it to the European Union (its application is still pending). The past decade under the secular government of Prime Minister Recept Tayyip Erdogan has been a milestone. Coming out of a severe financial crisis in 2001, the country adopted financial and fiscal reforms. Gross domestic product more than tripled -- from $196 billion in 2001 to about $763 billion in 2011. Growth rates hover around 8.5%. Bank liquidity is strong; Turkish banks boast 18% or 19% capital adequacy ratios.
Growth this year and last has been more subdued, as a large and expanding current account deficit and the euro-zone crisis continue to affect capital inflows. Investors also are spooked by geopolitical concerns over rising tensions across the border with Syria. Still, warts and all, Turkey is a thriving example of how a democratic and predominantly Muslim country can function in the post-Arab Spring era.
Its demographics are especially appealing to investors. More than half of Turkey's 75 million population is under 30. The middle class has expanded rapidly, broadening purchasing power and driving demand for a range of consumer goods and services. About 80% of Turkey's GDP is consumption-driven.
In Istanbul, where the glorious ancient past often clashes with the messy present and future, the evidence is hard to miss. Foreign cars clog narrow, winding streets. Satellite TV dishes grow thick on buildings like a predatory fungus. Istiklal Caddesi, the city's famed 1.8-mile pedestrian avenue lined with retailers and fast-food outlets, is a noisy, busy, relentless river of human traffic until the wee hours.
"We didn't just emerge from communism; Nestlé and Ericsson have been operating here for over 100 years," observes Unver in a recent interview at the firm's Istanbul offices on the banks of the Bosphorus, overlooking the bridge linking Europe and Asia.
For private equity, consumerism is the primary draw. Healthcare is a close second, followed by education, transport and manufacturing.
Large-cap leveraged buyouts are an anomaly. TPG Capital and local partner Actera Group engineered an $810 million purchase in 2006 of Mey Içki San. ve Tic. AS, the country's largest producer of popular anisette-based liquor. That put Turkey on everyone's radar. Their splashy exit through a $2.1 billion sale last year to the U.K.'s Diageo plc -- for a gain of more than 400% -- further cemented investors' appreciation of the country's potential.
Most investors remain midmarket-centric, buying minority stakes mainly with growth equity, as befits the opportunities. And despite signs that Turkey's popularity as a PE destination may have dimmed somewhat with the euro-zone turmoil, industry practitioners are leery that the market may be overheating as more capital seeks elusive targets. "Demand is there, but supply isn't necessarily there," says BC Partners Ltd.'s managing partner Nikos Stathopoulos. "Sellers have realized this, so the combination of scarcity of assets and higher valuation expectations is resulting in very few transactions being completed."
That could spell trouble not only for Turkven but other investors.
Istanbul has a gamut of local, regional and global players, though exactly how many is difficult to pin down. Estimates run between 30 and 50 firms that invest in Turkey. Of homegrown firms, Actera, which raised a $500 million-plus fund in 2007; Mediterra Capital Management Ltd., with €100 million ($124 million) in assets under management; and Turkven are perhaps the most well-known. Mediterra and Actera are raising their next funds, targeting €815 million and $250 million, respectively, according to London industry tracker Preqin Ltd. Turkven wrapped up a $1 billion pool in April, its third, with commitments entirely from offshore institutions. (Turkish limited partners in private equity funds are rare, in part due to an undeveloped regulatory framework.)
Turkven was launched in 2000 by Unver, Seymur Tari and investment banker Eren Nil, who is not at the firm. Both Unver and Tari are ex-McKinsey & Co. executives with M.B.A.s from l'Institut Européen d'Administration des Affaires, or Insead, and engineering backgrounds. Tari has degrees in mechanical engineering and robotics from Eidgenössi-
sche Technische Hochschule Zürich. He worked at Caterpillar Inc. in Geneva as a product manager overseeing Europe, the Middle East and Africa and the Commonwealth of Independent States. Unver has electrical engineering and computer science degrees from the Massachusetts Institute of Technology. Several other colleagues, including Sepin Sinanlioglu Inceer, Kerem Onursal and Goktekin Dincerler, also hailed from either McKinsey or the now-defunct accounting firm Arthur Andersen, where Unver worked for a spell in Boston.
A few come from a PE background, but most have an operational bent. "We do our own due diligence, and we like to crawl under the skin of businesses and management," explains Unver.
Which is one reason, he adds, that Turkven takes a long time to transact investments. "Doing deals is not easy anywhere, but we have more opportunities than difficulties," says Unver. "Turks are open to innovation."
At least in the early days, investing involved educating business owners. There's a language problem where metrics based on Ebitda are often alien to Turkish executives. "There are many ways to calculate Ebitda, so we need to be precise with the definition," says Unver.
Financial engineering isn't in the Turkish lexicon either. "Growth replaces the need for leverage," says Can Deldag, managing director of Carlyle Group's Mena Investment Advisors LLC in Istanbul, one of three global PE firms with a local presence. (Advent and Blackstone Group LP are the others.)
"When you double the revenues of a company in a year's time, you use the debt capacity to grow instead of using it to generate returns," says Deldag, whose Mena fund has invested in five transactions since completing a $500 million fund in 2009. Only three of these are in Turkey: TVK Ship Construction Industry & Trade Inc., a builder of chemical tankers; Bahçesehir Koleji, a K-12 school operator; and Medical Park Saglik Hizmetleri AS, the country's largest medical chain, with 19 hospitals.
On the other hand, leverage is increasingly playing a role in transactions. Seven of Turkven's last eight deals were buyouts, with the firm acquiring up to 51% equity, though debt multiples are fairly conservative, the firm says.
"We buy stable, established companies with steady cash flows, and leveraging depends on cash flows," says Unver. "We are not into aggressive gearing on buyouts."
Turkven, like its brethren, is very low key, declining to disclose transaction values, let alone equity investments. The firm does best in the upper end of the midmarket range, or companies with enterprise values of between $200 million and $400 million, says Unver.
Turkey's dramatic economic changes have led to shifts in its shareholder base, as family-owned businesses increasingly seek outside capital for expansion. "Company owners want to stay with us to create more value; it's easier to convince sellers that we can build that," says Mena's Deldag.
In the early days, founders or owners held a big chunk of the equity. Such was the case with UNO, where Advent, Turkven and Unmas founders acquired 100% from Dogus, which Turkven and Advent exited in 2006 for a profit, selling to the founders. Turkven and Advent together held 50%, the founders, 50%. In 2006, the sponsors sold their stake to the founders' company, Doruk.
The pair went on to invest in Intercity, a long-term car rental company founded by a local entrepreneur and off-road racing national champion, in 2004. The business provided fleets of cars to local and multinational clients, operating more than 6,000 cars at the time. The financial sponsors and co-investors plowed in $78 million in equity and debt, the largest PE deal at that time.
For the Intercity deal, three of Turkven's limited partners, the International Finance Corp.; the German bilateral development agency Deutsche Investitions- und Entwicklungsgesellschaft mbH, known as DEG; and its Dutch counterpart Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden NV, known as FMO, provided $60 million in debt. The capital infusion was used to support fleet expansion and management upgrades. The sponsors sold their stake in 2008 to a unit of Mitsubishi Corp.
From its pioneering days, Turkven has made slow but steady progress. "With increasing exposure and maturity, they have become more independent and visible," says Murat Yesildere, an Istanbul consultant with recruiter Egon Zehnder International, which has worked with numerous private equity firms.
Turkven also matured. Having gained exposure and experience, "they have redefined their investment strategy and principles and started to look for full control and ownership -- ideally," he adds.
Its first true buyout came in 2006, when Turkven and Advent bought 71.5% of Roma Plastik Ticaret AS from its founders. The Gebze, Turkey-based company, with sales of more than €40 million, was the fifth-largest supplier of paper and plastic edging used in furniture finishes in the world, and one of only two such manufacturers in Europe.
As with most of Turkven's deals, the purchase price wasn't disclosed, but the buyout conferred a €56 million value to the business. Financing was supplied by UniCredit Bank Austria AG in Vienna, which was then at the center of Central European finance. At the time, Turkish banks were primarily engaged in asset-backed lending and weren't geared up to collateralize against future cash flows.
That's changed. "Turkish banks have caught on," says Unver. "They are a "little bit more aggressive and compete among themselves, as they have very healthy balance sheets and need to deploy capital."
Migros was a banner deal both for Turkey and Turkven. The supermarket chain was 53% owned by Koç Holding AS, the country's largest industrial conglomerate, controlled by the Koç family. When Koç decided to dispose of its stake in late 2007, the group tapped JPMorgan Chase & Co. to oversee a sale. London-based BC Partners won, with Turkven as a local partner, in a highly competitive bid.
They outbid Kohlberg Kravis Roberts & Co. LP in addition to a consortium of Blackstone and Croatian food manufacturer and retailer Agrokor d.d., as well as other strategics.
The sponsors, which included DeA Capital SpA, the PE arm of Italy's De Agostini SpA, took Koç's 53% stake, then made a tender offer for the rest, as required by Turkish exchange rules. The buyers ultimately paid much more for the deal but ended up with 98%, just short of a full take-private in the absence of a squeeze-out provision in Turkish law.
At $3.25 billion in total value, the deal was easily the largest LBO to date. It was also said to be the largest foreign direct investment in the country. It dwarfed KKR's $1.3 billion purchase a few months earlier of ferry operator U.N. Ro-Ro Isletmeleri AS.
BC Partners had taken an interest in Turkey long before the Migros deal. It liked food retail, which it deems a "very defensive sector," and Migros is Turkey's largest, says Stathopoulos, who led the deal. "We invested in the No. 1 player in a growing country and a growing sector, which due to its defensive characteristics is able to withstand market volatility."
Migros was poised to gain share from the unorganized retail sector, or traditional mom-and-pop stores, known as bakkals, that represent more than 60% of Turkey's retail sector, he adds.
The timing of the transaction, coming just before Lehman Brothers Holdings Inc. collapsed, was tough for those that relied on international banks for financing. But the buyers benefited from having committed financing from three Turkish banks: T. Garanti Bankasi AS, Türkiye Is Bankasi AS and Türkiye Vakiflar Bankasi TAO. Migros was well known to them as a cash cow, says Stathopoulos. The deal ended up relying exclusively on Turkish banks for the roughly 50% leverage, or more than $1.5 billion.
"It was a relatively bold move because we made a very big investment in a new country for us," says Stathopoulos. Since the LBO, the company has grown in double digits both in revenue and number of stores. It disposed of a discount unit, Sok, selling to local foodmaker Ülker Group for about $381 million, representing a substantial capital gain.
Last April the sponsors sold 17.4% of the shares in a quasi relisting for about $515 million. That there was accelerated bookbuilding for the shares in London and Geneva was indicative of how keen investor interest is in Turkey's consumer sector. "Migros was the quintessential proxy for consumer retail in Turkey," says Unver.
Their Migros investment -- the sponsors still own 80%, of which Turkven's share is 3% -- is worth more now, the sponsors say, though they declined to say by how much.
If success in private equity is measured by the quality and quantity of exits, Turkven, which targets 3 to 4 times cash-on-cash returns, has a leg up. Turkven founder Tari recently told trade publication Private Equity International that his firm scored an average of 3.4 times returns from prior realizations.
In 2010 the firm, along with Advent, sold Roma Plastik to Austria's Fritz Egger GmbH & Co. for an undisclosed amount. Last year Turkven sold its majority stake in independent payment processor Provus Service Provider SA and wholly owned subsidiary S.C. Romcard SA to Innova Capital of Poland.
The realizations have been a boon to the firm's fundraising efforts over the years. Its fund size has increased exponentially. Turkven followed up its modest, $41 million maiden fund raised in 2002 with a $428 million second fund in 2007, almost 10 times the first.
Now, as it finds places to park its $1 billion fund, having more capital puts pressure on the firm to put larger amounts to work. That also means that it has become more difficult for the firm to steer clear of auctions.
"Our day job is not to compete in these tenders," says Unver, but he says the firm does select "exceptional" deals, such as Migros, where they bring a competitive angle, in cooperation with partners.
As of April, Bridgepoint Advisers Group Ltd., Carlyle, Advent and Turkven had been short-listed to acquire a minority stake in Turkish hosiery company Penti Çorap Sanayi ve Ticaret AS, according to media reports. Second-round bids were due early June. The target is one of Turkey's biggest pantyhose and hosiery manufacturers, which plans to open its first U.S. branch in Boston. The bidders are vying for a reported 49% stake, valuing the company at around $400 million.
|Turkey private equity is looking up|
|A sampling of the range of private equity investments in Turkey|
|Target company||Sponsors||Sector||Transaction value ($mill.)||Investment type||Equity amount ($mill.)||Transaction Date|
|Migros Türk TAS||BC Partners,
DeA Capital SpA
|Ro-Ro Isletmeleri AS||Kohlberg, Kravis Roberts & Co.||Shipping||1300||LBO||NA||October 2007|
|Acibadem Saglik Hizmetleri ve Ticaret AS||Abraaj Capital Ltd.||Hospitals||NA||LBO*||NA||November 2011|
|Mey Içkii Sanayi ve Ticaret AS||TPG Capital,
|Alcoholic beverages||810||LBO||330||Aptil 2006|
|TVK Shipyard||Carlyle Group||Chemical tankers||NA||LBO||NA||July 2008|
|Bahçesehir Kolejleri||Carlyle Group||Education||NA||growth||NA||January 2012|
|* Abraaj raised its minority holding in 2008
NA = Not Available
In November Turkven was said to be bidding for Turkish department store Yeni Karamursel Giyim ve Ihtiyac Maddeleri Tic. ve San. AS, or YKM. The target operates 38 stores and 24 franchises in Istanbul and Anatolia. But YKM, which pulls in $280 million in revenue, went to larger rival Boyner Holding, Turkey's largest nonfood retailer, for a reported $108 million, media reports say.
Details are still sketchy, but Turkven has acquired a stake in Koton Magazacilik Tekstil San. ve Tic. AS, Turkey's first ready-to-wear fashion brand, for an undisclosed amount.
Understandably, competition has hardened across the board. Part of the problem is that the business community is still relatively small, as if private equity has gotten ahead of itself in a market that's inadequately developed. "If you put all the CEOs together in Turkey, you're only talking about maybe 500 altogether," says Ismail Esin, founder of Esin Avukatlik Ortakligi, an affiliate of Baker & McKenzie LLP.
Investors find themselves writing larger equity checks. "Ten years ago, international and local PE firms were aiming to invest about $5 million to $25 million per transaction; nowadays, as the fund sizes allocated to Turkey have increased, many teams are chasing transactions, where the invested capital exceeds $50 million," says Emre Erginler, founder and managing partner of Istanbul M&A advisory firm 3 Seas Capital Partners, which is part of Imap Inc., a global network of independent boutiques.
Deals now take much longer to complete, industry practitioners say. Last summer, TPG and a host of other PE groups were reportedly vying for discount retail chain A101 Yeni Magazacilik AS, a transaction expected to fetch up to 1 billion lira ($550 million). The auction, managed by Goldman Sachs Group Inc., has yet to announce a winner.
An auction for Turkish newspaper and television station owner Sabah-ATV, the country's second-largest media group, owned by Çalik Holding AS and run by the prime minister's son, is still pending. Ditto a sale process for drugmaker Bilim Ilaç. Actera was rumored to be in the running for a 10% stake that would value the company at more than $900 million.
Meanwhile, the Penti auction was ongoing as of early July. Sources say there are no shortage of competitors, including Turkven.
For private equity investors, auctions aren't the desired route. "The most successful deals in Turkey are those negotiated privately, though that doesn't mean that privately negotiated deals don't have competition," says Deldag. "But sometimes you can't avoid it when you're trying to pay fair value," he adds.
What's punishing for PE firms on the buy side, however, can be highly providential on the sell side. In late June, Turkven sold Pronet Güvenlik ve Danismanlik Hizmetleri AS, the country's largest security alarm provider, to British buyout firm Cinven Ltd. The transaction, which is said to be worth between €300 million and €350 million, was perhaps the earliest secondary buyout in Turkey, and yet another sign of too much money chasing deals.
"That was a signature exit for the firm that attracted around 60 interested bidders initially," says Yesildere, who adds that he is "still optimistic" that internal rates of return will be attractive for "diligent" players.
Adds Yesildere, "Turkven's flexibility in exit timings and investment size will be advantages for the competitive seasoning in the market."